College students have options when it comes to getting loans

Odds are that if you’re going to college these days, you’re getting a student loan.

Or maybe more than one. There are multiple loan options out there -- direct loans, PLUS loans, private loans and even home equity loans -- and all are not created equal.

The most common, and most desirable, type of student loan are direct loans from the federal government, also known as Stafford loans. “Hands down the best loan to start with is a federal student loan,” said Debbie Cochrane, research director at The Institute for College Access and Success, which runs the Project on Student Debt.

Students who demonstrate financial need qualify for subsidized direct loans and all students, regardless of need, can take out unsubsidized direct loans.

Subsidized and unsubsidized direct loans both carry an interest rate of 4.29 percent for undergraduates this school year, but unsubsidized loans accrue interest while the student is in school and immediately afterward, and subsidized loans do not.

One of the biggest advantages that direct federal loans have over other loans is that students can choose from a variety of repayment options, said Ms. Cochrane, including income-driven repayment, which adjusts monthly repayment amounts dependent on income.

Undergraduate students are limited in total direct loan funding to $5,500 for their freshman year, $6,500 for their sophomore year and $7,500 in subsequent years, with the total for undergraduate education not to exceed $31,000.

At LaRoche College in McCandless, just over three quarters of the students there carry direct federal loans. Over the course of four years, students graduate with an average debt of $25,000, said Robert Clemens, assistant director of financial aid.

For those that need to borrow more than the direct loan limits, families can turn to PLUS loans, he said, which currently carry an interest rate of 6.84 percent. PLUS loans can be taken out up to the cost of attendance determined by the school, minus any other finanical assistance. If a parent doesn’t qualify for a PLUS loan, a student can then borrow additional funds in unsubsidized student loans.

In addition, or instead of PLUS loans, families can also search for loans from private lenders — a market that has expanded in recent years. “One of the things that used to be the case is that they were definitely more expensive than the guaranteed student loan programs,” said Mr. Clemens. “Because that marketplace has grown significantly, there is competition amongst lenders that has really started to drive rates lower on certain private loans.”

For families that have equity in their homes, Kimberly McCurdy of the Pennsylvania Higher Education Assistance Agency also recommends investigating home equity loans, saying that interest rates on those may be lower than PLUS loans or private loans.

But families in that position should also ask themselves whether the amount they are borrowing is advisable, said Ms. Cochrane, noting that ideally, families would not have to borrow more than the Stafford loan limits. ”I think that’s a good place to pause and assess the options,” she said.

The process of thinking about loans should start when students are first considering different schools, she said, recommending that families look not just at the sticker price for a school but also at the average loan debt of graduates — information that is available on college scorecards put out by the federal government. ”You can have very high tuition schools where the debt is very low and you can also have schools where tuition might be low but costs are high because there isn’t enough grant aid to go around,” she said. ”The link between tuition cost and student debt isn’t always straightforward.”

One rule of thumb is that students shouldn’t borrow more than the salary that they expect to make their first year out of college, said Ms. McCurdy, higher education access partner at the PHEAA, who runs workshops on financial aid for parents and students. She recommends exercises on websites such as educationplanner.org and mysmartborrowing.org to help students figure out a ballpark salary.

“The student really needs to consider how much they’re borrowing for their education,” she said. ”If I’m going to make $30,000, I probably shouldn’t borrow $60,000.”

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